Abstract:
During the last decade, several studies have argued that sticky information model proposed by Mankiw and Reis (2002), in which firms update their information occasionally rather than instantaneously, explains some stylized facts about the inflation dynamics. Sticky information pricing model successfully captures the sluggish movement of aggregate prices in response to monetary policy shocks. Despite the importance of sticky information, no empirical studies have been done yet to estimate sticky information Philips Curve (SIPC) and its key parameter - the degree of information rigidity - in Iran. This paper is the first attempt to estimate the degree of information stickiness in Iran using the two stage empirical approach proposed by Khan and Zhu (2006). Having the correct structural parameter allows a better understanding of the dynamics of inflation. Results show that the average duration of information stickiness ranges from 3.2 to 4 quarters in Iran. In addition, the existence of threshold effects in SIPC is also tested in this paper. Based on the estimation of TAR model over 2002Q2- 2015Q1, firms update information faster when inflation is higher. This evidence suggests that firms are more aware of macroeconomic conditions when inflation is higher; that is, missing information during high inflation periods is costly.
Machine summary:
"Vol. 10, No. 1 Winter 2015 Threshold Effects in Sticky Information Philips Curve: Evidence from Iran Hematy, Maryam and Pedram, Mehdi Received: 12/29/2015 Approved: 6/7/2016 Abstract During the last decade, several studies have argued that sticky information model proposed by Mankiw and Reis (2002), in which firms update their information occasionally rather than instantaneously, explains some stylized facts about the inflation dynamics.
Following the two stage empirical approach proposed by Khan and Zhu (2006), the degree of information stickiness in Iran is estimated in this paper.
In general, empirical studies on estimation of SIPC can be classified based on the data used for representing past expectations: 1) studies use Survey of Professional Forecasters (SPF) [for instance Carroll (2003), Dopke et al.
Using financial institutions’ and firms’ survey data from Peru and the model proposed by Carroll (2003) and Carrera (2012), the degree of information rigidity between financial institutions and the firm managers for the Peruvian economy is estimated.
For the first time, Carrera and Ramirez-Rondan (2014) used threshold models to identify high and low inflation regimes and estimate the SIPC for each identified regime for 12 OECD countries, following the strategy of Khan and Zhu (2006).
Low values of real rigidity imply substantial strategic complementarities in price setting among firms and are necessary for the sticky information model to deliver a delayed response of inflation to monetary shock.
Therefore, TAR model can be defined as follows: where and are information rigidity parameters for low and high inflation regimes, respectively, and is the threshold level."